What Will Be the Most Interesting Currency Pair in 2012?

In 2011, currency traders saw tremendous volatility, as forex markets were rocked by major events that lead to significant shifts in big currency pairs. What pair will dominate the headlines in 2012? While any number of cataclysmic events could lead to a tremendous shakeup in the currency market, ongoing conditions continue to suggest that the EUR/USD could be at the center of trading for much of 2012. The euro crisis—which appeared in the wake of the 2008 financial crisis but did not really reach a boiling point until the summer—dominated trading for most of 2011 and could continue to dominate trading for most of 2012. Even the major currency events of 2011 that did not appear to relate to the pair had their roots in its movement. The pegging of the Swiss franc to the euro had much to do with the euro's relative weakness. As investors became concerned that the euro could come under fire (or even dissolve) they may have shifted their holdings from euros into francs. That trade enticed the Swiss National Bank to institute a peg, preventing the franc from appreciating against the euro. Japan faced similar problems in 2011, as its yen rallied in the face of euro weakness. The Bank of Japan intervened a handful of times in 2011, but was unable to bring the yen back to a level it was comfortable with. In 2012, as the euro crisis moves to a resolution or a failure, the euro may continue to experience a level of movement throughout the early part of the year. Last week, the European Central Bank implemented its LTRO program. The program was a type of refinancing for the banks, and in theory, could have lead to a pullback in the yields for indebted sovereigns in the Eurozone. The operation appears to have failed to an extent, as the yields on the Italian 10-year climbed back above 7% late last week, and continued to trade in that elevated range. Benzinga Pro alerted its subscribers to significant moves in the Italian 10-year, as its breeching of these levels have frequently coincided with powerful moves in the broader market. As January is a month in which these countries will have to sell a significant amount of debt into the market to continue financing their operations, the yields on these bonds may continue to rally. If a major negative event were to transpire, it could lead to significant strength in the US dollar. If the dollar strengthens tremendously, the Federal Reserve could come in with a program of its own, perhaps undertaking a third round of quantitative easing in an effort to drive down the value of the dollar. Although the Fed denies that it is working to weaken the dollar, many market critics have alleged that the Fed's quantitative easing programs have been explicitly used to drive down the dollar's exchange value. At any rate, 2012 is setting up to be an interesting year in the forex markets. As the euro situation continues to unfold, traders may wish to keep their eyes on the EUR/USD pair. Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.